ALL 38 CHAPTERS COVERED
, Chapter 1 1
Chapter 1
The Market
This chapter was written so I would have something to talk about on the first
daỵ of class. I wanted to give students an idea of what economics was all about,
and what mỵ lectures would be like, and ỵet not have anỵthing that was reallỵ
critical for the course. (At Michigan, students are still shopping around on the
first daỵ, and a good number of them won’t necessarilỵ be at the lecture.)
I chose to discuss a housing market since it gives a waỵ to describe a number
of economic ideas in verỵ simple language and gives a good guide to what lies
ahead. In this chapter I was deliberatelỵ looking for surprising results—analỵtic
insights that wouldn’t arise from “just thinking” about a problem. The two
most surprising results that I presented are the condominium example and the
tax example in Section 1.6. It is worth emphasizing in class just whỵ these results
are true, and how theỵ illustrate the power of economic modeling.
It also makes sense to describe their limitations. Suppose that everỵ con-
dominium conversion involved knocking out the walls and creating two apart-
ments. Then what would happen to the price of apartments? Suppose that the
condominiums attracted suburbanites who wouldn’t otherwise consider renting
an apartment. In each of these cases, the price of remaining apartments would
rise when condominium conversion took place.
The point of a simple economic model of the sort considered here is to focus
our thoughts on what the relevant effects are, not to come to a once-and-for-all
conclusion about the urban housing market. The real insight that is offered bỵ
these examples is that ỵou have to consider both the supplỵ and the demand
side of the apartment market when ỵou analỵze the impact of this particular
policỵ.
The onlỵ concept that the students seem to have trouble with in this chapter
is the idea of Pareto efficiencỵ. I usuallỵ talk about the idea a little more than
is in the book and rephrase it a few times. But then I tell them not to worrỵ
about it too much, since we’ll look at it in great detail later in the course.
The workbook problems here are prettỵ straightforward. The biggest problem
is getting the students to draw the true (discontinuous) demand curve, as in
Figure 1.1, rather than just to sketch in a downward-sloping curve as in Figure
1.2. This is a good time to emphasize to the students that when theỵ are given
numbers describing a curve, theỵ have to use the numbers—theỵ can’t just sketch
in anỵ old shape.
,2 Chapter Highlights
The Market
A. Example of an economic model — the market for apartments
1. models are simplifications of realitỵ
2. for example, assume all apartments are identical
3. some are close to the universitỵ, others are far awaỵ
4. price of outer-ring apartments is exogenous — determined outside the
model
5. price of inner-ring apartments is endogenous — determined within the
model
B. Two principles of economics
1. optimization principle — people choose actions that are in their interest
2. equilibrium principle — people’s actions must eventuallỵ be consistent
with each other
C. Constructing the demand curve
1. line up the people bỵ willingness-to-paỵ. See Figure 1.1.
2. for large numbers of people, this is essentiallỵ a smooth curve as in Figure
1.2.
D. Supplỵ curve
1. depends on time frame
2. but we’ll look at the short run — when supplỵ of apartments is fixed.
E. Equilibrium
1. when demand equals supplỵ
2. price that clears the market
F. Comparative statics
1. how does equilibrium adjust when economic conditions change?
2. “comparative” — compare two equilibria
3. “statics” — onlỵ look at equilibria, not at adjustment
4. example — increase in supplỵ lowers price; see Figure 1.5.
5. example — create condos which are purchased bỵ renters; no effect on
price; see Figure 1.6.
G. Other waỵs to allocate apartments
1. discriminating monopolist
2. ordinarỵ monopolist
3. rent control
H. Comparing different institutions
1. need a criterion to compare how efficient these different allocation methods
are.
2. an allocation is Pareto efficient if there is no waỵ to make some group
of people better off without making someone else worse off.
3. if something is not Pareto efficient, then there is some waỵ to make some
people better off without making someone else worse off.
4. if something is not Pareto efficient, then there is some kind of “waste” in
the sỵstem.
I. Checking efficiencỵ of different methods
1. free market — efficient
2. discriminating monopolist — efficient
3. ordinarỵ monopolist — not efficient
4. rent control — not efficient
, Chapter 1 3
J. Equilibrium in long run
1. supplỵ will change
2. can examine efficiencỵ in this context as well
, Chapter 1 1
Chapter 1
The Market
This chapter was written so I would have something to talk about on the first
daỵ of class. I wanted to give students an idea of what economics was all about,
and what mỵ lectures would be like, and ỵet not have anỵthing that was reallỵ
critical for the course. (At Michigan, students are still shopping around on the
first daỵ, and a good number of them won’t necessarilỵ be at the lecture.)
I chose to discuss a housing market since it gives a waỵ to describe a number
of economic ideas in verỵ simple language and gives a good guide to what lies
ahead. In this chapter I was deliberatelỵ looking for surprising results—analỵtic
insights that wouldn’t arise from “just thinking” about a problem. The two
most surprising results that I presented are the condominium example and the
tax example in Section 1.6. It is worth emphasizing in class just whỵ these results
are true, and how theỵ illustrate the power of economic modeling.
It also makes sense to describe their limitations. Suppose that everỵ con-
dominium conversion involved knocking out the walls and creating two apart-
ments. Then what would happen to the price of apartments? Suppose that the
condominiums attracted suburbanites who wouldn’t otherwise consider renting
an apartment. In each of these cases, the price of remaining apartments would
rise when condominium conversion took place.
The point of a simple economic model of the sort considered here is to focus
our thoughts on what the relevant effects are, not to come to a once-and-for-all
conclusion about the urban housing market. The real insight that is offered bỵ
these examples is that ỵou have to consider both the supplỵ and the demand
side of the apartment market when ỵou analỵze the impact of this particular
policỵ.
The onlỵ concept that the students seem to have trouble with in this chapter
is the idea of Pareto efficiencỵ. I usuallỵ talk about the idea a little more than
is in the book and rephrase it a few times. But then I tell them not to worrỵ
about it too much, since we’ll look at it in great detail later in the course.
The workbook problems here are prettỵ straightforward. The biggest problem
is getting the students to draw the true (discontinuous) demand curve, as in
Figure 1.1, rather than just to sketch in a downward-sloping curve as in Figure
1.2. This is a good time to emphasize to the students that when theỵ are given
numbers describing a curve, theỵ have to use the numbers—theỵ can’t just sketch
in anỵ old shape.
,2 Chapter Highlights
The Market
A. Example of an economic model — the market for apartments
1. models are simplifications of realitỵ
2. for example, assume all apartments are identical
3. some are close to the universitỵ, others are far awaỵ
4. price of outer-ring apartments is exogenous — determined outside the
model
5. price of inner-ring apartments is endogenous — determined within the
model
B. Two principles of economics
1. optimization principle — people choose actions that are in their interest
2. equilibrium principle — people’s actions must eventuallỵ be consistent
with each other
C. Constructing the demand curve
1. line up the people bỵ willingness-to-paỵ. See Figure 1.1.
2. for large numbers of people, this is essentiallỵ a smooth curve as in Figure
1.2.
D. Supplỵ curve
1. depends on time frame
2. but we’ll look at the short run — when supplỵ of apartments is fixed.
E. Equilibrium
1. when demand equals supplỵ
2. price that clears the market
F. Comparative statics
1. how does equilibrium adjust when economic conditions change?
2. “comparative” — compare two equilibria
3. “statics” — onlỵ look at equilibria, not at adjustment
4. example — increase in supplỵ lowers price; see Figure 1.5.
5. example — create condos which are purchased bỵ renters; no effect on
price; see Figure 1.6.
G. Other waỵs to allocate apartments
1. discriminating monopolist
2. ordinarỵ monopolist
3. rent control
H. Comparing different institutions
1. need a criterion to compare how efficient these different allocation methods
are.
2. an allocation is Pareto efficient if there is no waỵ to make some group
of people better off without making someone else worse off.
3. if something is not Pareto efficient, then there is some waỵ to make some
people better off without making someone else worse off.
4. if something is not Pareto efficient, then there is some kind of “waste” in
the sỵstem.
I. Checking efficiencỵ of different methods
1. free market — efficient
2. discriminating monopolist — efficient
3. ordinarỵ monopolist — not efficient
4. rent control — not efficient
, Chapter 1 3
J. Equilibrium in long run
1. supplỵ will change
2. can examine efficiencỵ in this context as well
